Is Your Retirement Account Helping Your Tax Return?

We all dream of retirement – especially on days when the alarm goes off too early. But could your retirement account be helping you with your tax return now? Things have changed since last year. Here are some things to consider before you file your 2021 tax return.

Check Your Tax Credit Qualification

Depending on your adjusted income, you may qualify for a tax credit for making certain contributions to your IRA or employer-sponsored retirement plan. Read more about the Saver Credit eligibility to see if you could take a credit of up to $1,000.

Avoid Paying an Early Withdrawal Penalty

If you withdraw from your retirement accounts before age 59 ½, you are subject to income taxes plus an additional 10 percent early withdrawal tax. However, due to the COVID-19 pandemic, in 2020 there were many exceptions that waived this fee. Most of them have been reduced at this point, but you can still avoid paying an early withdrawal penalty if you are using the funds for post-secondary education or as a first-time homebuyer. Click here to learn more about exceptions to tax on early distributions.

Rollover Your Retirement after a Job Change

If the post-pandemic economy has you changing jobs, avoid income tax by transferring your 401(k) directly to another 401(k) or IRA. Without a direct transfer, 20 percent of the amount withdrawn will be withheld for income taxes and you could also owe the early withdrawal penalty.

Don’t Forget about Required Minimum Distributions

If you are age 72, your retirement account may feature required minimum distributions. This is an increase from the previous 70 ½ age requirement. While this was waived in 2020 due to COVID, that is not the case for 2021. The penalty for missing a required minimum distribution is 50 percent of the amount that should have been withdrawn – in addition to the income tax due. Consider directing your required minimum distribution to the charity or church of your choice to avoid tax liability.

Dodge Double Distributions

Avoid increased income taxes by ensuring you do not take two distributions in one year. You are required to take your first minimum distribution by April 1 of the year after you turn 72 (or 70 ½ if you were born before July 1, 1949). Following this distribution, subsequent withdrawals must be taken by December 31 each year. This could mean that you end up with two distributions in the same tax year if you wait until the April deadline, which could bump you into a higher tax bracket.

Similarly, by taking smaller distributions before age 62 can help spread your tax bill over multiple years, rather than dramatically increasing your taxable income once you turn 72. This would all depend on your other income at those ages.

If you have questions regarding how your retirement account could be influencing your income taxes, don’t hesitate to contact MBJ Accounting about setting up an appointment.

Issuing 1099s: What You Need to Know

The Internal Revenue Service requires that Form 1099s are issued by January 31.  This means that you can’t wait until tax time to determine if you need to be issuing these important documents.

What Is a 1099?

A Form 1099 refers to one in a series of IRS tax forms used to document income other than those outlined by a Form W-2, which includes salaries, wages and tips.  The IRS requires a business to issue a Form 1099 when services are rendered for a cost of $600 or more annually.

So, what does this mean for you?  If you are a contractor, you may be familiar with a 1099 as the form your client issues as proof of the services you have provided.  What you may not have considered is when your business needs to be the one issuing the form(s).

How Do I Determine if I Need to Issue a 1099?

Form 1099(s) are generated by businesses.  If you earn a salary or hourly wages by working for a company that is not your own and are issued a W-2 at the end of each year to file your personal taxes, you don’t need to worry about filing a Form 1099. 

However, if you are self-employed, receive income directly from your clients or customers or file a separate business schedule with your taxes annually, you should determine if any of your expenses require you to issue a 1099.  Thus, if you are a hairstylist, provide childcare services, conduct in-home sales or do lawncare on the side – as just a few examples – keep reading.

Specifically, the IRS requires a Form 1099 be issued when the following four conditions are met:

  1. You made a payment to someone who is not your employee;
  2. You made a payment for services in the course of your trade or business;
  3. You made a payment to an individual, partnership, estate, or in some cases, a corporation; and
  4. You made payments to the payee of at least $600 during the year.

If your business meets these four criteria, the next step is to determine if the payment was for a qualifying expense.

What Type of Expenses Qualify for 1099s?

Any time that you pay a non-employee for a service-related expense of $600 or more, you should issue a Form 1099.  Review your company’s records to see if you have paid any vendor more than $600 for any type of service or labor.  This does not apply to the purchase of goods, but rather, services such as:

  • Attorney Fees
  • Bookkeeping
  • Booth / Business Rental Space
  • Cleaning Services
  • Consultation Services
  • Graphic Design
  • Inspections
  • Lawncare
  • Maintenance / Repairs
  • Marketing Consultation
  • Professional Photography
  • Tax Advising and Tax Preparation Services

These are just some common examples of the types of services for which your business might use a separate, non-employee contractor.  For example, if you purchased a company vehicle for $20,000, you would not need to issue a 1099.  However, if you paid $20,000 in maintenance and repair for your fleet of company vehicles over the course of the year, you would want to issue a 1099 to your mechanic.

Rent is another type of expense that can require a 1099.  If you rent a specific space to conduct your trade – like a booth at a hair salon or an office in a multi-tenant building, you should include your landlord among your vendors needing a Form 1099.  Conversely, individuals working from a home office generally capture rent expenses elsewhere on their tax returns.

If you purchased a company vehicle for $20,000, you would not need to issue a 1099.  However, if you paid $20,000 in maintenance and repair for your fleet of company vehicles over the course of the year, you would want to issue a 1099 to your mechanic.

Does My Vendor Require a 1099?

Once you’ve determined what expenses may qualify for a Form 1099, you next need to assess what type of vendor or contractor you utilized.  If the individual or company providing your service is incorporated, you do not need to issue a Form 1099.  However, if your vendor is a sole proprietor, an LLC, LLP or PC, you’ll need to issue a 1099.

There are some exceptions to this rule, especially with attorneys.  When in doubt, contact your vendor directly to determine if you should issue a 1099. 

While you’re at it, be sure that you have the necessary information to issue the 1099, including the contractor’s legal name, what type of legal entity the vendor is and their Employee Identification Number (EIN) or Social Security Number.  The easiest way to collect this information, is to have your vendor complete a Form W-9.  Click here for a blank form that you can send. 

It is a best practice to collect this information when you issue the payment, so you may have already collected it.  However, it’s best to double check that none of their information has changed and always have a signed W9 on file.

How Did You Pay the Vendor?

The last step when determining whether to issue a Form 1099 is to establish exactly how much you paid and how you issued the payment.  If you provided payment through your bank account, such as with a check, debit card transaction or automatic payment, you will need to issue the 1099.  On the other hand, if you provided payment through a third-party service like PayPal, or with a credit card, the merchant is responsible for issuing a Form 1099K.

What Is the Benefit of Issuing a 1099?

The process of issuing Form 1099(s) can be complicated, especially if your company uses multiple contractors and vendors.  The IRS does require this documentation for services rendered in excess of $600, and your vendors will probably be depending on the information to file their own tax returns.  Thus, it’s important to take 1099s into consideration early in the year to ensure that you are issuing them in a timely manner. 

This can also help you avoid paying penalties to the IRS.  Specifically, if you do not issue a 1099 for the 2019 tax year by January 31, 2020, you will owe:

  • $50 per 1099 if filed not more than 30 days late
  • $110 per 1099 if filed 30+ days late but before August 1
  • $270 per 1099 if filed after August 1

Additionally, if you intentionally fail to file a 1099, then there are additional consequences.  Click here to see the full penalty schedule.

In many cases, it can be advantageous for you and your company to file Form 1099(s) as it provides documentation of expenses incurred in the course of your trade or business.  This frequently indicates a tax write-off, so it does work in your favor to take a good look at whether you should issue 1099s.

There are actually 10+ different types of Form 1099, so it is best to consult a tax professional when issuing these forms.  Contact us as soon as possible if you think that you need to issue 1099s for your small business.  We’re here to help make tax season as easy as possible for you.